Analyst calls for May 3
KUALA LUMPUR, May 3 — This is a selection of morning calls by local research houses for the day.
From HwangDBS Vickers
Sector update — Malaysian Aviation
Khazanah Nasional and Tune Air have reversed the share swap exercise which took place in August last year. The deal involved Khazanah Nasional exchanging a 20.5 per cent stake in Malaysian Airline System (MAS) for 10.0 per cent in AirAsia.
As part of the reversal, AirAsia’s Tan Sri Tony Fernandes and Datuk Kamarudin Meranun resigned from MAS’ board, with Datuk Mohamed Azman bin Yahya following suit from AirAsia’s board.
Although the share swap has been reversed, both airlines have advanced their collaboration in specific areas with the signing of two memorandum of understandings (MoU) for joint maintenance services and the establishment of a special purpose vehicle (50 per cent:35 per cent:15 per cent owned by MAS:AirAsia:AirAsia X) to extract procurement synergies such as fuel oil, aircraft components and parts.
With the swap reversal, the collaboration would not be as strong as initially structured. However, both airlines could see benefits from areas under the MoUs. In particular, joint procurement of fuel oil could see cost savings, given the sizeable combined requirements of the two groups.
Two areas of the initial collaboration have been dropped — cessation of focus areas, which specifies that MAS focus on being a full-service premium carrier and AirAsia on being a regional low-cost carrier, and assessment for collaboration on provision of network services. The implication of the cessation of focus areas is unclear at this point.
Fernandes stated in AirAsia Invest TV that he does not think Firefly will return to the low cost segment to challenge AirAsia.
This episode shows the bargaining power of the unions at this time and challenges in MAS’ restructuring and cost down efforts. We maintain our Fully Valued call on MAS and AirAsia with target prices of RM1.10 and RM3.10 respectively.
We are concerned about MAS’ stretched balance sheet. Net gearing could surpass its current 4.4x as MAS seeks funding for scheduled delivery of aircraft. In our view, the operating environment for airlines remains challenging due to stubbornly high oil prices, which could dampen passenger travel demand.
MBM Resources
MBM has fixed its rights issue price at RM1.42/rights share and exercise price of RM3.20/warrant. Recall, the Group proposed a 3-for-10 rights issue with 3 free warrants and 3-for-10 bonus issue. The rights price of RM1.42 is at a significant discount to the theoretical ex-all price (TEAP) of RM4.14, based on yesterday’s closing price of RM4.96.
The rights issue is intended to raise funds for its business expansion and working capital requirements. We recommend shareholders to subscribe to the rights issue as it will be a cheap entry to MBM’s shares.
We believe the downside from the dilution can be offset by its future expansion plans. Phase 1 of its alloy wheel plant is targeted for completion by 4Q12 while MBM could be potentially accumulating funds to set up its own vehicle manufacturing plant.
Maintain Buy at RM6.10 TP pegged to 9.5 FY12F EPS.
From OSK Research
Sector update — Malaysian Aviation
Sparked by the strong resistance from the 20,000 employees of MAS’s unionised workforce, AirAsia and MAS announced the reversal of last year’s controversial share swap agreement between the two major shareholders.
Additionally, both AirAsia (and AirAsia X) and MAS has also signed a new Supplemental Agreement to vary the terms and scope of the initial Collaboration Agreement signed last year. This new supplemental agreement will see the carriers entering into an MOU to jointly explore (by setting up a SPV or joint venture company) in collaborating in the areas of procurement, training, maintenance and etc.
With the share swaps reversed, we are likely to see competition intensifying back again.
As Malaysia is predominantly a low-cost passenger market with a penetration rate of over 57 per cent, this gives AirAsia the upper advantage given its low cost structure and vast route network, hence limiting the pressure from MAS in view of its ailing financial condition.
The share swap reversal would likely boost investor sentiment on AirAsia on improved confidence with the return of Tan Sri Tony Fernandes as a major shareholder fully dedicating its time back in AirAsia as the CEO.
We maintain our BUY call on AirAsia at a FV of RM4.57 premised at 12x PE, which is a 20 per cent discount to its peers average.
It remains to be seen how willingly MAS’s sizable unionized workforce would be committed to a positive change (through extreme cost cutting measures) going forward.
As such, our fundamental view on MAS remains unchanged, which continues to face headwinds from high oil prices and intensifying competition amid weak demand for premium travel. Maintain SELL at RM0.90 premised at 8x FY13 EV/EBITDA.
With both AirAsia and MAHB as a BUY, we maintain our OVERWEIGHT call on the aviation sector.
Sector update—Thai telecommunications
We are already at the midway point of the 3G licensing auction timeline, with the NBTC currently firming up the draft Information Memorandum (IM) for public exposure. As such, we expect the share prices of telcos to re-rate on any news that will bring them a step closer to the auction, slated to be held in 4QFY12.
We maintain OVERWEIGHT on the sector despite the recent run-up in share prices, with ADVANC (BUY, FV: THB188) being our top pick while remaining neutral on DTAC (NEUTRAL, FV: THB72). Any changes to our calls would depend on the release of the latest results by this week.
Our FVs for ADVANC and DTAC could potentially rise by 27 per cent and 67 per cent to THB238 and THB120 respectively based on our best-case assumption of full 3G take-up within five years from the start of 2013.
Century Software
Century Software (CSHB)’s 1QFY12 earnings of RM2 million constitute only 10 per cent of our and consensus estimates but we deem it to be in-line with expectations, given:
(i) commencement of revenue recognition from contracts worth RM39.1 million secured in April,
(ii) more meaningful revenue contribution from its Indonesian subsidiary, Praisindo Teknologi moving forward and
(iii) stronger recurring revenue in the 2H from providing maintenance services.
We maintain our BUY recommendation on CSHB with a fair value (FV) of RM0.57 based on 9x FY13 PER.
* These recommendations are solely the opinion of the respective research firms and not endorsed by The Malaysian Insider. The Malaysian Insider shall not be liable for any loss arising from any investment based on any recommendation, forecast or other information contained here.
